Securities Litigation Reform: The First Year's Experience a Statistical and Legal Analysis of Class Action Securities Fraud Litigation Under the Private Securities Litigation Reform Act of 1995

Abstract:     
This paper presents a preliminary analysis of the effects of the Private Securities Litigation Reform Act of 1995 on class action securities fraud litigation behavior. The Reform Act appears to have had little effect on the aggregate number of companies sued, but has induced a substitution effect into state court where plaintiff's argue that many of the Act's provisions do not apply. Complaints now allege accounting irregularities and trading by insiders with greater frequency than before, while pure false forecasting cases are now relatively rare. The average stock price decline preceding litigation is now 31%, whereas prior to the Reform Act it was 19%. The Act's "strong inference" pleading requirement is the most likely cause of these shifts. High technology firms continue to be the most frequent targets of litigation, and the appearance ratio of the largest plaintiffs' firm, Milberg Weiss, has increased significantly nationwide and particularly in California. These findings are all consistent with a model that views class action securities fraud litigation as an economic process involving rational profit maximizing agents. The data are, however, too preliminary to support strong conclusions regarding the "success" or "failure" of Reform Act innovations.

working papers series